Wednesday, 26 September 2018

We take the plunge...

...and in the interests of scientific inquiry our household has a go at changing electricity retailers.

Time, in short, to stop being the competition equivalent of an unmarried marriage counsellor, and actually use the tools available to increase competition in electricity retailing.

We haven't been averse to switching in the past, but I'd got disillusioned by the first wave of retail competition. The phone would go - it was usually telephone marketing then - and we'd get an offer. Of sorts: a lower fixed daily rate but a higher cents per unit usage rate, or a lower cents per unit usage rate and a higher fixed daily rate. No offer at that time was unambiguously better than your incumbent's tariff, with lower fixed and lower usage rates. You were reduced to getting out a calculator and figuring out whether you'd actually be better off.

So we ended up in the large number of people who didn't switch - somewhere between 400,000 to 750,000 households, according to our recent Electricity Price Review - and helped provide a captive base for the retailers to exploit. As this graph from the Review shows, the gap between the best and worst price plan, and the gap between the best plan and the incumbent's in a a particular area, have been widening, suggesting (Review, p38) that "those consumers who don’t or can’t easily shop around are paying more and more than they need to".

It's been a bit of a mystery - in the UK, in Australia, here - why consumers just sit there and apparently let themselves be exploited. You can't - and shouldn't - ever rule out the possibility that their decisions are entirely rational: when a lot of people do something, there tends to be a reason. But equally the conventional wisdom is more down the lines of low switching reflecting some form of problem in the switching market.

So I set out, with our sample of one, to see if I could figure out what it might be.

I went for Consumer's Powerswitch though I could as easily have used the Electricity Authority's What's My Number. It went easily enough, though I discovered two little wrinkles.

One was that our incumbent - who I'll call Oldco - didn't make it obvious what pricing plan we were currently on (unlike our broadband or mobile suppliers, who do). I figured it out from the wording of the charge for unit usage, and by matching our charges (after grossing up for GST) with those shown (GST inclusive) in the drop-down menu of Oldco pricing plans that appears on Powerswitch.

The other was that Oldco didn't show annual electricity consumption, which you need to get the best plan for you. Powerswitch says that your retailer will tell you if you ask, but it isn't volunteered (or not anywhere I could find on the bill or using Oldco's online app). You can however add up your last twelve months' bills manually, so I did (a little over 9,000 kWh).

Powerswitch came up with a wide range of competitive alternatives, with annual savings of around $500 to $600, or roughly 20%. Well worth having, so I pressed the 'Switch' button and signed up with Newco.

And it's at that point that I unearthed at least one of the reasons for consumer reluctance to switch. Putting aside the associated free and frank discussion on lack of intra-household consultation, what most concerned my better half was, "what if something goes wrong?"  (in our case enlivened by recollection of a previous attempt to change broadband supplier, which had gone phut). This is (I gather from para 9.210 on p504 of the UK electricity review) quite a common fear, though higher among those who haven't switched than among those who've actually given it a go:
We agree with the views expressed by some parties that the perception of problems by those who had not attempted to switch appears to be somewhat greater than the experience of problems by those who had. In contrast to the experience of those who shopped around or switched, 66% of those who did not shop around or switch in the last three years agreed that ‘switching is a hassle I do not have time for’ (compared with 40% of those who had shopped around or switched in the last three years) and 57% agreed ‘I worry things will go wrong if I switch’ (compared with 37% of those who had shopped around or switched in the last three years).
In the end the spirit of pro-competitive market discipline prevailed over fears of a cock-up, and Newco got the tick.

When Newco contacted us, they said that "During this process you may get a call from the previous power company", and rather disarmingly added, "that’s what we’d do". And Oldco indeed e-mailed us, offering a cash rebate, a bigger prompt payment discount, a two-year price guarantee (which was also part of the Newco offer), and - belatedly - the offer of a better pricing plan (with an element of lock-in for two years).

No deal. We're gone to Newco. Some critical mass of people need to follow through on switching, or the system won't work. And - accepting that our own inertia let them get away with it - we're not feeling especially charitable to Oldco. A short term profit focus may well lead the Oldcos of this world to offer poor default plans, anticipating (often correctly) that you won't jib. But if I were in a corner suite at Oldco and thinking strategically about longer-term customer goodwill and regulatory risks, I think I'd be questioning the wisdom of the old way of running the whelk stall.

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